Jack Townsend offers this blog on Federal Tax Crimes principally for tax professionals and tax students. It is not directed to lay readers -- such as persons who are potentially subject to U.S. civil and criminal tax or related consequences. LAY READERS SHOULD READ THE PAGE IN THE RIGHT HAND COLUMN TITLE "INTENDED AUDIENCE FOR BLOG; CAUTIONARY NOTE TO LAY READERS." Thank you.

Wednesday, January 7, 2015

China's Worldwide Tax System (1/7/14; 1/9/14)

Given the discussion on this blog of how the U.S. is abusive to U.S. citizens abroad because of the U.S. system of worldwide taxation, I thought this was an interesting and might draw some comments from readers. Keith Bradsher, China Wants Taxes Paid by Citizens Living Afar (NYT 1/7/15), here.

Here are the opening paragraphs:

As Chinese individuals and companies head overseas in greater numbers, the country’s tax authorities are starting to follow.

The Beijing billionaires who set up cryptically named companies in the British Virgin Islands to hold their fortunes are in the cross hairs. So are the Guangdong salesmen living and working in Africa and Latin America. China’s tax officials are now demanding that citizens start reporting exactly how much money they earn overseas.

In asking for this information, national and municipal tax agencies in China are quietly beginning to enforce a little-known and widely ignored regulation: Citizens and companies must pay domestic taxes on their entire worldwide incomes, not just on what they earn in China.

I am not sure that the U.S. Congress (which determines our tax regime (I know some tea parties think it is the IRS; they are wrong)) can take great comfort in the fact that China has a similar system. Indeed, many of us have lived our lives listening to U.S. politicians (Congressmen included) vilify China (think McCarthy and his ilk and then segueing into Vietnam where the domino theory was based on China and Russia toppling the dominoes and bringing great woe to all of humanity).

But the broader issue is whether, given a global economy, a single country worldwide (sometimes called citizen based taxation) system is a good thing. There are people paid a lot more than I am to struggle with that issue, but I am sure that readers will have some feelings. Let's here them.

My thought is that, eventually, in a broader sense, we are all in this together. By we, I mean our progeny who, in my view, are we. We all sink or swim on a globe that must sustain us. In my mind, we need to pull together a global government or at least a global organization that will coordinate the effort to, in William Faulkner's words, insure that "man will not merely endure: he will prevail." There must be some system that, in the final analysis, make sure that we all contribute to enduring and prevailing. That requires a compulsory tax because we are too selfish to make voluntary contributions to a system that allows us to endure or prevail. And that is why government or quasi-government is so important.

Addendum 1/9/15 1:30am:

A commenter pointed out a rebuttal to the New York Times article. See No, China does not have citizenship-based taxation (Isaac Brock Society 1/8/15), here, written by someone identified only as Eric in the blog. The rebuttal is quite detailed and, taken at face -- I can't speak as to whether it is more accurate than the NYT article on the point of contention -- seems to be a detailed rebuttal of the notion in the article that the Chinese taxation system parallels in some respect the U.S. CBT system. So, I invite readers to consider the Eric blog entry, and thank the commenter for calling it to our attention. I do note that, as of 1/9/15 at 1:31am, the NYT has not acknowledged that the article errs in this respect. (The article does provide two unrelated corrections; I presume that someone has called it to the attention of the NYT and the authors of the NYT article.)

2 comments:

Well, I thought tax policy discussions were banned on this forum, but since you open the door:- on CBT, I am generally fine with the policy idea of someone saying there are responsibilities underpinning citizenship, which includes the obligation to pay tax, and as long as you retain citizenship, you are morally obligated to fulfill those responsibilities- On US CBT, however, the problem lies in its complexity and its is disregard for the fact that some US citizens may actually build lives outside the US. US tax law is inherently suspicious of any financial activity that occurs outside the US. Perhaps that makes sense, since for most US residents (recent immigrants aside), such activity has long been a sign of/vehicle for tax avoidance and/or evasion. Hence, PFIC rules, FBARs, Form 8938s, etc. That does not, however, apply to lUS citizens who are long-term expats. True. US tax laws do provide some relief, via earned income deductions and treaty benefits, but the former is limited only to income (and generally benefits short-term expats) and the latter can differ dramatically across various countries.- So, on the one hand, Congress says, you have obligations as a citizen to pay tax but on the other, it says, but we cannot be bothered to build a simple, efficient and reasonable tax system that recognizes the fact you are a long term expat. Such a system would exempt long term expats from FBARs, FATCA reporting, would allow them tax efficient investments in pensions, would leave them free to buy an ETF on a local stock exchange without penalty, would eliminate phantom currency gains from the sale of capital assets and so on. Congress knows all this and pretty much doesn't care.- So, yes, fine, tax expat citizens but also allow them the same economic liberty to live their lives as if they were in the US and free them from a system that treats them as tax cheats simply because they live abroad.

I agree with everything you say in the last two paragraphs of your January 7, 2014 posting. To a large degree, the globally agreed tax system IS in place. The Europeans are seeing to it by automating the exchange of information. The problems is that the US, Eritrea and, now, China won't go along with what most of the other countries in the world have agreed to.

The basic concept is fairly simple and has nothing to do with citizenship. Basically, you pay taxes to the place where you or your business reside. For example, you have a business in the France but you live in the US You pay tax on your income from your business in France to the French. Any other income from other sources(such as interest, US businesses, capital gains, dividends, etc) you pay to the US. What right does the US have to tax French based income? The French government provides the police, road, etc which benefit the business. In this example, the US government doesn't incur any expense related to the business and therefore is not entitled to benefit from its existence.

The problem with citizenship based taxation is that it is an attempt to syphon tax revenue from the country in which the revenue was earned.

Obviously, there are many ways to "game" the system but many of them have already been anticipated. Here is a link to a recent version of the agreement: http://www.keepeek.com/Digital-Asset-Management/oecd/taxation/model-tax-convention-on-income-and-on-capital-2010_9789264175181-en#page8

The US is already part of the OECD but rather than go by all of the rules of the group they want their own special rules because they want a better deal than everybody else. If the US completely joined this agreement they would soon get automatic data exchange. Since the 2009 protocol hasn't been ratified(and probably won't be any time soon), they would get the benefits of the data exchange. I'm not an expert on this agreement but I believe that in order for the US to get data under the exchange terms they would have to also be willing to supply requested data. That seems to be a major sticking point. They want the data but reciprocate. I'm not so sure how happy American banks will be to have to do what the US is requiring of foreign banks. I'd like to see that political battle play itself out. There is a good chance that it would go nowhere like the 2009 protocol.

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